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Chapter 4: Q11 (page 104)

Select the correct answer. A price floor will usually shift:

a. demand

b. supply

c. both

d. neither

Illustrate your answer with a diagram.

Short Answer

Expert verified

Price Floor will shift : d) Neither demand, nor supply.

Step by step solution

01

Price Floor Concept 

Price Floor is the minimum mandated price of a commodity, fixed by regulatory body, to protect the interests of sellers and prevent them from being exploited.

Example : Minimum support price of agricultural goods.

02

Detail Explanation 

Price Floor is just an imposed price, above the equilibrium price - ie where demand & supply curves intersect.

It doesn't shift either demand or supply curve, just fixes a price above their intersection point. A change in the price can cause movement along the existing demand and supply curves, but not a shift.

03

Diagram 

The equilibrium price is where demand & supply (D & S) intersect, denoted by P.

The floor price is set above equilibrium price at P*. As evident, it has shifted neither demand nor supply.

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Most popular questions from this chapter

Under what circumstances would a minimum wage be a nonbinding price floor? Under what circumstances would a living wage be a binding price floor?

Identify each of the following as involving either demand or supply. Draw a circular flow diagram and label the flows A through F. (Some choices can be on both sides of the goods market.)

a. Households in the labor market

b. Firms in the goods market

c. Firms in the financial market

d. Households in the goods market

e. Firms in the labor market

f. Households in the financial market

Imagine that to preserve the traditional way of life in small fishing villages, a government decides to impose a price floor that will guarantee all fishermen a certain price for their catch.

a. Using the demand and supply framework, predict the effects on the price, quantity demanded, and quantity supplied.

b. With the enactment of this price floor for fish, what are some of the likely unintended consequences in the market?

c. Suggest some policies other than the price floor to make it possible for small fishing villages to continue.

Suppose that a 5% increase in the minimum wage causes a 5% reduction in employment. How would this affect employers and how would it affect workers? In your opinion, would this be a good policy?

In the financial market, what causes a movement along the supply curve? What causes a shift in the supply curve?
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